UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q/A
AMENDMENT NO. 1
--------------------------
(Mark One):
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER: 0-27058
--------------------------
PAREXEL INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2776269
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
195 WEST STREET
WALTHAM, MASSACHUSETTS 02451
(Address of principal executive offices) (Zip code)
TELEPHONE NUMBER (781) 487-8900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
Indicated by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of May 6, 2003, there were 25,645,241 shares of PAREXEL International
Corporation common stock outstanding, excluding 861,000 shares in treasury.
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-Q/A is being filed solely to delete from
the Company's Quarterly Report on Form 10-Q for the period ended December 31,
2002, originally filed on February 14, 2003 (the "Original Filing"), two
sentences that provided information based on the Company's income from
operations excluding a restructuring charge and to add to the Original Filings
two sentences that explain the impact to the Company's income from operations
from such restructuring charge. The deleted sentences were included in the
Original Filing under the caption "Results of Operations" for the three month
period and six month period ended December 31, 2002, in Part I, Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The sentences have been deleted so that the Company's registration
statement on Form S-3 (File No. 333-103539), which incorporates by reference the
Original Filing, will comply with the requirements of Item 10(e) of Regulation
S-K. The Company has not modified Item 2 below in any other respect.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The financial information discussed below is derived from the Condensed
Consolidated Financial Statements included herein. The financial information set
forth and discussed below is unaudited but, in the opinion of management,
reflects all adjustments (primarily consisting of normal recurring adjustments)
considered necessary for a fair presentation of such information. The Company's
results of operations for a particular quarter may not be indicative of results
expected during subsequent fiscal quarters or for the entire year.
The statements included in this quarterly report on Form 10-Q, including
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", may contain "forward-looking statements", within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding the adequacy of the
Company's existing capital resources and future cash flows from operations, and
statements regarding expected financial results, future growth and customer
demand. For this purpose, any statements that are not statements of historical
fact may be deemed forward-looking statements. Without limiting the foregoing,
the words "believes", "anticipates", "plans", "expects", "intends", "appears",
"will" and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
Company's actual results, including the Company's actual operating performance,
actual expense savings and other operating improvements resulting from
restructurings, and actual future results, to differ materially from the results
indicated by the forward-looking statements. These important factors are
discussed in greater detail under "RISK FACTORS" below and elsewhere in this
quarterly report.
The forward-looking statements included in this quarterly report represent
the Company's estimates as of the date of this quarterly report. The Company
specifically disclaims any obligation to update these forward-looking statements
in the future. These forward-looking statements should not be relied upon as
representing the Company's estimates or views as of any date subsequent to the
date of this quarterly report.
OVERVIEW
The Company is a leading biopharmaceutical services company, providing a
broad range of knowledge-based contract research, medical marketing, consulting
and technology products and services to the worldwide pharmaceutical,
biotechnology, and medical device industries. The Company's primary objective is
to provide solutions for managing the biopharmaceutical product lifecycle with
the goal of reducing the time, risk and cost associated with the development and
commercialization of new therapies. Over the past twenty years, PAREXEL has
developed significant expertise in processes and technologies supporting this
strategy. The Company's product and service offerings include: clinical trials
management, data management, biostatistical analysis, medical marketing,
clinical pharmacology, regulatory and medical consulting, performance
improvement, industry training and publishing, web-based portal solutions, IVRS,
electronic data capture solutions, medical diagnostics services, and other drug
development consulting services. The Company believes that its integrated
services, depth of therapeutic area expertise, and sophisticated information
technology, along with its experience in global drug development and product
launch services, represent key competitive strengths.
The Company is managed through four business segments, namely, CRS, PCG,
MMS and Perceptive. CRS constitutes the Company's core business and includes
clinical trials management and biostatistics and data management, as well as
related medical advisory and investigator site services. PCG provides technical
expertise in
1
such disciplines as clinical pharmacology, regulatory affairs, industry
training, publishing, and management consulting. PCG consultants identify
alternatives and propose solutions to address clients' product development,
registration, and commercialization issues. MMS provides a full spectrum of
market development, product development, and targeted communications services in
support of product launch. Perceptive provides technology solutions to improve
clients' product development and commercialization processes. Perceptive offers
a portfolio of products and services that include web-based portals, IVRS,
electronic data capture solutions, and medical diagnostics.
Most of the Company's contracts are fixed price, with some variable
components, and range in duration from a few months to several years. Cash flow
from these contracts typically consists of a down payment required to be paid at
the time of contract execution with the balance due in installments over the
contract's duration, usually on a milestone achievement basis. Revenue from
these contracts is generally recognized as work is performed. As a result, cash
receipts do not necessarily correspond to costs incurred and revenue recognized
on contracts.
Generally, the Company's clients can terminate their contracts with the
Company upon thirty to sixty days' notice or can delay execution of services.
Clients may terminate or delay contracts for a variety of reasons, including,
among others: merger or potential merger-related activities involving the
client, the failure of products being tested to satisfy safety requirements or
efficacy criteria, unexpected or undesired clinical results of the product,
client cost reductions as a result of budgetary limits or changing priorities,
the client's decision to forego a particular study, insufficient patient
enrollment or investigator recruitment, or production problems resulting in
shortages of the product.
Effective January 1, 2002, the Company adopted Emerging Issues Task Force
("EITF") 01-14 "Income Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred". These out-of-pocket expenses are reflected in
the Company's Condensed Consolidated Statements of Operations under
"Reimbursement Revenue" and "Reimbursable Out-of-Pocket Expenses".
As is customary in the industry, the Company routinely subcontracts on
behalf of its clients with independent physician investigators in connection
with clinical trials. These investigator fees are not reflected in PAREXEL's
Service Revenue, Reimbursement Revenue, Reimbursable Out-of-Pocket Expenses,
and/or Direct Costs, since such fees are reimbursed by clients on a "pass
through" basis, without risk or reward to the Company. The amounts of these
investigator fees were $20.7 million and $24.3 million for the three months
ended December 31, 2002 and 2001, respectively, and $38.8 million for both the
six-month periods ended December 31, 2002 and 2001.
Direct Costs primarily consist of compensation and related fringe benefits
for project-related employees, other project-related costs not reimbursed by
clients, and allocated costs related to facilities and information systems.
Selling, General and Administrative expenses consist principally of compensation
and related fringe benefits for selling and administrative employees,
professional services, advertising costs, and certain costs related to
facilities and information systems.
The Company's stock is quoted on the Nasdaq Stock Market under the symbol
"PRXL."
CRITICAL ACCOUNTING POLICIES
The following critical accounting policies are used in the preparation of
the Company's financial statements.
REVENUE
Service revenue on fixed price contracts is recognized as service is
provided based on the ratio that costs incurred or units delivered to-date bear
to the estimated total costs or units delivered at completion, as estimated by
project managers on a monthly basis. This method requires the Company to
estimate total expected revenue and total expected costs. Revenue related to
contract modifications is recognized when the Company has reached agreement with
the client, the amounts are reasonably determinable, and the services have been
performed. Generally, the assigned financial manager or financial analyst
reviews contract estimates on a monthly basis. Adjustments to contract estimates
are made in the periods in which the facts that require the revisions become
known. Historically, there have not been any significant variations between
contract estimates and the actual costs
2
incurred, which were not recovered from clients. In the event that future
estimates are materially incorrect, they could materially impact the Company's
consolidated results of operations or financial position.
BILLED ACCOUNTS RECEIVABLE, UNBILLED ACCOUNTS RECEIVABLE, AND DEFERRED REVENUE
Billed accounts receivable represent amounts for which invoices have been
sent to clients. Unbilled accounts receivable represent amounts recognized as
revenue for which invoices have not yet been sent to clients. Deferred revenue
represents amounts billed or payments received for which revenue has not yet
been earned. The Company maintains an allowance for doubtful accounts based on
historical collectability and specific identification of potential problems. In
the event the Company is unable to collect all or part of its outstanding
receivables, there may be a material impact to the Company's consolidated
results of operations or financial position.
INCOME TAXES
The Company's global provision for corporate income taxes is calculated
using the tax accounting rules established by SFAS No. 109. Income tax expense
is based on the distribution of profit before tax amongst the various taxing
jurisdictions in which the Company operates, adjusted as required by the tax
laws of each taxing jurisdiction. Changes in the distribution of profits and
losses between taxing jurisdictions may have a significant impact on the
Company's effective tax rate. The provision is a combination of current-year tax
liability and future tax liability/benefit that results from differences between
book and taxable income that will reverse in future periods. Deferred tax assets
and liabilities for these future tax effects are established on the Company's
balance sheet. A valuation allowance is established if it is more likely than
not that future tax benefits will not be realized. Monthly interim tax provision
calculations are prepared during the year. Differences between these interim
estimates and the final results for the year could materially impact the
Company's effective tax rate and its consolidated results of operations or
financial position.
EMPLOYEE STOCK COMPENSATION
The Company elected to follow Accounting Principal Board Opinion No. 25,
"Accounting for Stock Options Issued to Employees" ("APB 25"), and related
interpretations in accounting for the Company's employee stock options because
the alternative fair value accounting provided for under SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, no compensation expense is recognized because the
exercise price equals the market price of the underlying stock on the date of
the grant. If PAREXEL accounted for stock options under SFAS 123, the Company
would have recorded additional compensation expense for stock option grants to
employees. If PAREXEL were unable to account for stock options under ABP 25, the
Company's financial results would be materially adversely affected to the extent
that additional compensation expense had to be recognized. The additional
compensation expense could vary significantly from period to period based on
several factors including the number of stock options granted and stock price
and/or interest rate fluctuations.
FOREIGN CURRENCIES
The Company derives a large portion of its service revenue from operations
in foreign countries. The Company's financial statements are denominated in U.S.
dollars. As a result, factors associated with international operations,
including changes in foreign currency exchange rates, could significantly affect
the Company's results of operations. Gains and losses on transactions
denominated in currencies other than an entity's functional currency are
reported in other income (expense). Adjustments from the translation of the
subsidiary entities' foreign functional currencies to U.S. dollars are reported
in accumulated other comprehensive income/(loss) within stockholder's equity.
GOODWILL
Goodwill represents the excess of the cost of an acquired business over
the fair value of the related net assets at the date of acquisition. Prior to
the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets", goodwill
was amortized using the straight-line method over its expected useful life.
Subsequent to the adoption of SFAS No. 142, goodwill is subject to annual
impairment testing. The Company has assessed the impairment of goodwill under
SFAS No. 142 in fiscal year 2002. Based on this assessment, there was no
impairment identified at
3
June 30, 2002. Any future impairment of goodwill could have a material impact to
the Company's consolidated results of operations or financial position.
RESULTS OF OPERATIONS
ANALYSIS BY SEGMENT
The Company evaluates its segment performance and allocates resources
based on service revenue and gross profit (service revenue less direct costs),
while other operating costs are evaluated on a geographic basis. Accordingly,
the Company does not include the impact of selling, general, and administrative
expenses, depreciation and amortization expense, other income (expense), and
income taxes in segment profitability. Service revenue, direct costs and gross
profit on service revenue for the three months and six months ended December 31,
2002 and 2001 were as follows:
FOR THE THREE MONTHS ENDED DECEMBER 31, FOR THE SIX MONTHS ENDED DECEMBER 31,
------------------------------------------------- ---------------------------------------------------
INCREASE INCREASE
($ IN THOUSANDS) 2002 2001 (DECREASE) % 2002 2001 (DECREASE) %
- ---------------- ---- ---- ---------- ----- ---- ---- ---------- -----
Service revenue:
CRS $ 75,149 $ 63,361 $ 11,788 18.6% $147,046 $124,139 $ 22,907 18.5%
PCG 25,084 23,726 1,358 5.7% 49,874 45,429 4,445 9.8%
MMS 17,316 14,868 2,448 16.5% 34,398 29,979 4,419 14.7%
Perceptive 4,799 4,919 (120) -2.4% 10,383 9,167 1,219 13.3%
-------- -------- -------- -------- -------- --------
$122,348 $106,874 $ 15,474 14.5% $241,701 $208,714 $ 32,987 15.8%
======== ======== ======== ======== ======== ========
Direct costs:
CRS $ 48,456 $ 42,317 $ 6,139 14.5% $ 96,394 $ 83,869 $ 12,525 14.9%
PCG 18,212 17,312 900 5.2% 36,045 33,825 2,220 6.6%
MMS 11,676 9,906 1,770 17.9% 22,954 20,200 2,754 13.6%
Perceptive 3,198 4,190 (992) -23.7% 7,093 7,726 (633) -8.2%
-------- -------- -------- -------- -------- --------
$ 81,542 $ 73,725 $ 7,817 10.6% $162,486 $145,620 $ 16,866 11.6%
======== ======== ======== ======== ======== ========
Gross profit on
service revenue:
CRS $ 26,693 $ 21,044 $ 5,649 26.8% $ 50,652 $ 40,270 $ 10,382 25.8%
PCG 6,872 6,414 458 7.1% 13,829 11,604 2,225 19.2%
MMS 5,640 4,962 678 13.7% 11,444 9,779 1,665 17.0%
Perceptive 1,601 729 872 119.6% 3,290 1,441 1,849 128.3%
-------- -------- -------- -------- -------- --------
$ 40,806 $ 33,149 $ 7,657 23.1% $ 79,215 $ 63,094 $ 16,121 25.6%
======== ======== ======== ======== ======== ========
THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2001:
Service revenue increased by $15.5 million, or 14.5%, to $122.3 million
for the three months ended December 30, 2002 from $106.9 million for the same
period one year ago. Excluding foreign exchange fluctuations, current quarter
service revenue would have been $117.5 million, a year-over-year increase of
9.9%. On a geographic basis, service revenue for the three months ended December
31, 2002 was distributed as follows: The Americas - $64.9 million (53.1%),
Europe - $52.7 million (43.1%), and Asia/Pacific - $4.7 million (3.8%). For the
three months ended December 31, 2001, service revenue was distributed as
follows: The Americas - $61.7 million (57.7%), Europe - $40.7 million (38.1%),
and Asia/Pacific - $4.5 million (4.2%). On a segment basis, CRS service revenue
increased $11.8 million, or 18.6%, to $75.1 million for the three months ended
December 31, 2002 from $63.3 million in the same period in fiscal year 2002.
Excluding the impact of foreign currency fluctuations, CRS service revenue
increased by 14.0% primarily due to higher business volume in the biotech client
sector and in phases IIIb and IV of the clinical trial business, as well as a
lower rate of cancellations during the past six to seven months. PCG service
revenue increased by $1.4 million, or 5.7%, to $25.1 million in the three months
ended December 31, 2002 from $23.7 million in the three months ended December
31, 2001. Excluding the impact of foreign currency fluctuations, PCG service
revenue increased by 1.4%, primarily due to an increase in the regulatory
consulting and clinical pharmacology businesses. MMS service revenue increased
by $2.4 million, or 16.5%, to $17.3 million in the three-month period ended
December 31, 2002 from $14.9 million in the same period one year ago. Excluding
the impact of foreign currency fluctuations, MMS service revenue increased by
11.5% due to organic growth from an increase in the number of projects serviced
by the group, and incremental revenue from the acquisition of the Pracon and
HealthIQ division from Excerpta Medica, Inc. ("Pracon and HealthIQ"), which was
completed during the
4
second quarter of fiscal year 2003. Perceptive service revenue decreased by $0.1
million, or 2.4%, to $4.8 million in the three months ended December 31, 2002 as
compared with $4.9 million in the same period one year ago primarily due to a
high level of cancellations experienced in the April to September 2002
timeframe.
Reimbursement revenue consists of reimbursable out-of-pocket expenses
incurred on behalf of, and reimbursable by, clients. It does not yield any gross
profit to the Company, nor does it have an impact on net income.
Direct costs increased by $7.8 million, or 10.6%, to $81.5 million for the
three months ended December 31, 2002 from $73.7 million in the same period last
fiscal year. On a segment basis, CRS direct costs increased $6.1 million, or
14.5%, to $48.4 million for the three months ended December 31, 2002 from $42.3
million in the same three-month period in fiscal year 2002. The increase was due
primarily to foreign exchange fluctuations and higher labor costs associated
with business growth. As a percentage of service revenue, CRS direct costs for
the three months ended December 31, 2002 improved by 2.3 percentage points from
the same three-month period one year ago primarily due to improved operational
labor efficiencies and leveraging of strong revenue growth. PCG direct costs
increased $0.9 million, or 5.2%, to $18.2 million in the three months ended
December 31, 2002 from $17.3 million in the same period one year ago. The
increase was caused principally by foreign exchange fluctuations and inflation
driven increases in spending. As a percentage of service revenue, PCG direct
costs showed a marginal improvement of 0.4 points for the three months ended
December 31, 2002 as compared with the three-month period ended December 31,
2001. MMS direct costs increased $1.8 million, or 17.9%, to $11.7 million in the
three months ended December 31, 2002 from $9.9 million for the three months
ended December 31, 2001. The higher cost levels can be attributed to foreign
exchange fluctuations, increased labor costs associated with the Pracon and
HealthIQ acquisition, and higher labor costs associated with business growth. As
a percentage of service revenue, MMS direct costs for the three months ended
December 31, 2002 increased by 0.8 points over the same period one year ago
primarily as a result of leveraging revenue growth. Perceptive direct costs
decreased $1.0 million, or 23.7%, to $3.2 million in the three months ended
December 31, 2002 from $4.2 million in the same period in the last fiscal year
primarily due to lower labor costs associated with a lower level of business
volume. As a percentage of service revenue, Perceptive's direct costs for the
three months ended December 31, 2002 improved by 18.5 percentage points from the
same three-month period one year ago primarily due to a more favorable business
mix.
Selling, general and administrative ("SG&A") expenses increased by $3.6
million, or 14.8%, to $28.1 million for the three months ended December 31, 2002
from $24.5 million in the same period in the last fiscal year. Of the total
increase, approximately 4.6% was caused by foreign currency fluctuations with
the remaining increase primarily due to increased labor and facility-related
costs associated with business growth. As a percentage of service revenue, SG&A
remained relatively flat at 23.0% in the three-month periods ending December 31,
2002 and 2001.
Depreciation and amortization ("D&A") expense increased by $0.6 million,
or 13.9%, to $5.0 million for the three months ended December 31, 2002 from $4.4
million for the same period in the last fiscal year due to foreign currency
fluctuations and an increase in capital expenditures over the past twelve
months. As a percentage of service revenue, D&A remained at 4.1% for the three
months ended December 31, 2002 and 2001.
During the three months ended December 31, 2002, the Company recorded a
facilities-related restructuring charge totaling $5.9 million, as a result of
changes in prior assumptions regarding certain leased facilities which were
previously abandoned as part of the June 2001 restructuring charge. The changes
in prior assumptions were caused by challenging real estate market conditions
which have made it difficult to sub-lease the abandoned facilities, especially
at previously estimated rental rates. There were no special charges recorded
during the three months ended December 31, 2001.
Income from operations decreased by $2.5 million, or 58.7%, to $1.7
million for the three months ended December 31, 2002 from $4.2 million in the
same period one year ago primarily due to the facilities-related restructuring
charge discussed above. Income from operations for the three months ended
December 31, 2002 was adversely affected by $5.9 million due to the
facilities-related restructuring charge discussed above and in Note 5 to the
Company's financial statements. Income from operations decreased as a percentage
of service revenue to 1.4% for the three months ended December 31, 2002 from
3.9% for the same period in the last fiscal year.
Total other income/(loss) decreased $2.8 million to a loss of $1.3 million
in the three months ended December 31, 2002 from income of $1.5 million in the
three months ended December 31, 2001. The decrease was
5
primarily due to an increase in foreign exchange losses and lower interest
income in the second quarter of fiscal year 2003.
The Company had an effective income tax rate of 40.1% for the three months
ended December 31, 2002 and 38.4% for the three months ended December 31, 2001.
The increase was primarily due to unfavorable changes in the mix of taxable
income and losses in the different jurisdictions in which the Company operates.
Any future unfavorable changes in the mix of taxable income in the different
jurisdictions could materially impact the Company's effective tax rate and its
consolidated financial results of operations.
SIX MONTHS ENDED DECEMBER 31, 2002 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2001:
Service revenue increased by $33.0 million, or 15.8%, to $241.7 million
for the six months ended December 30, 2002 from $208.7 million for the same
period one year ago. Excluding foreign exchange fluctuations, service revenue
would have been $232.5 million, a year-over-year increase of 11.4%. On a
geographic basis, service revenue for the six months ended December 31, 2002 was
distributed as follows: The Americas - $129.6 million (53.6%), Europe - $102.6
million (42.5%), and Asia/Pacific - $9.5 million (3.9%). For the six months
ended December 31, 2001, service revenue was distributed as follows: The
Americas - $119.4 million (57.2%), Europe - $80.7 million (38.7%), and
Asia/Pacific - $8.6 million (4.1%). On a segment basis, CRS service revenue
increased $22.9 million, or 18.5%, to $147.0 million for the six months ended
December 31, 2002 from $124.1 million in the same period in fiscal year 2002.
Excluding the impact of foreign currency fluctuations, CRS service revenue
increased by 13.9% primarily due to higher business volume in the biotech client
sector and in phases IIIb and IV of the clinical trial business, as well as a
lower rate of cancellations during the past six to seven months. PCG service
revenue increased by $4.4 million, or 9.8%, to $49.9 million in the six months
ended December 31, 2002 from $45.4 million in the six months ended December 31,
2001. Excluding the impact of foreign currency fluctuations, PCG service revenue
increased by 5.5% primarily due to increases in the group's regulatory
consulting and clinical pharmacology businesses. MMS service revenue increased
by $4.4 million, or 14.7%, to $34.4 million in the six-month period ended
December 31, 2002 from $30.0 million in the same period one year ago. Excluding
the impact of foreign currency fluctuations, MMS service revenue increased by
9.9% due primarily to an increase in the number of projects serviced by the
group as well as incremental revenue resulting from the Pracon and HealthIQ
acquisition completed during the second quarter of fiscal year 2003. Perceptive
service revenue increased by $1.2 million, or 13.3%, to $10.4 million in the six
months ended December 31, 2002 as compared with $9.2 million in the same period
one year ago. The relatively low rate of growth is directly attributable to a
high level of cancellations during the April to September 2002 timeframe.
Reimbursement revenue consists of reimbursable out-of-pocket expenses
incurred on behalf of, and reimbursable by, clients. It does not yield any gross
profit to the Company, nor does it have an impact on net income.
Direct costs increased by $16.9 million, or 11.6%, to $162.5 million for
the six months ended December 31, 2002 from $145.6 million in the same period
last fiscal year. On a segment basis, CRS direct costs increased $12.5 million,
or 14.9%, to $96.4 million for the six months ended December 31, 2002 from $83.9
million in the same six-month period in fiscal year 2002. The increase was due
primarily to foreign exchange fluctuations and higher labor costs associated
with business growth. As a percentage of service revenue, CRS direct costs for
the six months ended December 31, 2002 improved by 2.0 percentage points over
the same period in the last fiscal year primarily due to a more favorable
business mix, improved operational labor efficiencies, and leveraging of strong
business growth. PCG direct costs increased $2.2 million, or 6.6%, to $36.0
million in the six months ended December 31, 2002 from $33.8 million in the same
period one year ago. The increase was caused principally by foreign exchange
fluctuations and higher employee-related expenses associated with increased
business volume. As a percentage of service revenue, PCG direct costs for the
six months ended December 31, 2002 improved by 2.2 percentage points over the
same period one year ago primarily due to improved labor cost efficiency. MMS
direct costs increased $2.8 million, or 13.6%, to $23.0 million in the six
months ended December 31, 2002 from $20.2 million for the six months ended
December 31, 2001. The higher cost levels can be attributed to foreign exchange
fluctuations, increased labor costs associated with an increased number of
projects serviced by the group, and incremental labor costs associated with the
Pracon and HealthIQ acquisition. As a percentage of service revenue, MMS direct
costs improved by 0.7 points in the six months ended December 31, 2002 over the
same period one year ago principally as a result of leveraging revenue growth.
Perceptive direct costs decreased $0.6 million, or 8.2%, to $7.1 million in the
six months ended December 31, 2002 from $7.7 million in the same period in the
last fiscal year
6
primarily due to lower revenue levels. As a percentage of service revenue,
Perceptive's direct costs for the six months ended December 31, 2002 improved by
16.0 percentage points over the same period one year ago primarily due to a more
favorable business mix and better labor cost leveraging.
Selling, general and administrative ("SG&A") expenses increased by $7.3
million, or 15.4%, to $54.7 million for the six months ended December 31, 2002
from $47.4 million in the same period in the last fiscal year. Of the total
increase, approximately 4.4% was caused by foreign currency fluctuations with
the remaining increase primarily due to increased labor and facility-related
costs associated with business growth. As a percentage of service revenue, SG&A
remained relatively flat at 22.6% in the six-month periods ended December 31,
2002 and 2001.
Depreciation and amortization ("D&A") expense increased by $0.9 million,
or 10.1%, to $9.8 million for the six months ended December 31, 2002 from $8.9
million for the same period last fiscal year due to foreign currency
fluctuations and higher capital spending during the past twelve months. As a
percentage of service revenue, D&A remained relatively flat at 4.1% for the six
months ended December 31, 2002 compared to 4.3% for the same period one year
ago.
During the six months ended December 31, 2002, the Company recorded a
facilities-related restructuring charge totaling $5.9 million, as a result of
changes in prior assumptions regarding certain leased facilities which were
previously abandoned as part of the June 2001 restructuring charge. The changes
in prior assumptions were caused by challenging real estate market conditions
which have made it difficult to sub-lease the abandoned facilities, especially
at previously estimated rental rates. There were no special charges recorded
during the six months ended December 31, 2001.
Income from operations increased by $2.0 million, or 30.0%, to $8.7
million for the six months ended December 31, 2002 from $6.7 million in the same
period one year ago primarily due to the reasons noted in the preceding
paragraphs. Income from operations for the six months ended December 31, 2002
was adversely affected by $5.9 million due to the facilities-related
restructuring charge discussed above and in Note 5 to the Company's financial
statements. Income from operations increased as a percentage of service revenue
to 3.6% for the six months ended December 31, 2002 from 3.2% for the same period
in the last fiscal year.
Total other income/(loss) decreased $5.4 million to a loss of $2.4 million
in the six months ended December 31, 2002 from income of $3.0 million in the six
months ended December 31, 2001. The unfavorable change was primarily due to an
increase in foreign exchange losses and lower interest income in the six-month
period ended December 31, 2002 as compared with the same period in the last
fiscal year, and having no counterpart to last year's one-time $0.9 million gain
on sale of a facility.
The Company had an effective income tax rate of 41.9% for the six months
ended December 31, 2002 and 38.2% for the six months ended December 31, 2001.
The increase was primarily due to unfavorable changes in the mix of taxable
income and losses in the different jurisdictions in which the Company operates.
Any future unfavorable changes in the mix of taxable income in the different
jurisdictions could materially impact the Company's effective tax rate and its
consolidated financial results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations and growth,
including acquisition costs, with cash flow from operations and proceeds from
the sale of equity securities. Investing activities primarily reflect
acquisition costs and capital expenditures for information systems enhancements
and leasehold improvements.
Most of the Company's contracts are fixed price, with some variable
components, and range in duration from a few months to several years. Cash flow
from these contracts typically consists of a down payment required to be paid at
the time of contract execution with the balance due in installments over the
contract's duration, usually on a milestone achievement basis. Revenue from
these contracts is generally recognized as work is performed. As a result, cash
receipts do not necessarily correspond to costs incurred and revenue recognized
on contracts.
The Company's operating cash flow is heavily influenced by changes in the
levels of billed and unbilled receivables and deferred revenue. These account
balances as well as days sales outstanding in accounts receivable, net of
deferred revenue, can vary based on contractual milestones and the timing and
size of cash receipts. Days
7
sales outstanding ("DSO") in accounts receivable, net of deferred revenue, was
50 days at December 31, 2002 compared with 59 days at December 31, 2001. The
decrease in DSO in the three months ended December 31, 2002 as compared with the
three months ended December 31, 2001 was primarily due to improved billing
practices, increased collection activities, and a higher level of deferred
revenue. Accounts receivable, net of the allowance for doubtful accounts was
$233.0 million ($146.2 million in billed accounts receivable and $86.8 million
in unbilled accounts receivable) at December 31, 2002 and $210.2 million ($121.3
million in billed accounts receivable and $88.9 million in unbilled accounts
receivable) at December 31, 2001. Deferred revenue was $141.4 million at
December 31, 2002 and $112.0 million at December 31, 2001. The $29.4 million
increase in deferred revenue was directly attributable to advance payments in
conjunction with new business arrangements entered into by the Company. Days
sales outstanding is calculated by adding the end-of-period balances for billed
and unbilled account receivables, net of deferred revenue and the allowance for
doubtful accounts, then dividing the resulting amount by the sum of total
revenue plus investigator fees billed for the most recent quarter, and
multiplying the resulting fraction by the number of days in the quarter.
The Company has lines-of-credit with foreign banks in the aggregate of
approximately $10.0 million. These lines-of-credit are not collateralized and
are payable on demand. At December 31, 2002, the Company had approximately $10.0
million available under these credit arrangements.
Net cash provided by operating activities for the six months ended
December 31, 2002 totaled $22.9 million and was generated from a $18.1 million
decrease in accounts receivable (net of the allowance for doubtful accounts and
deferred revenue), $9.8 million related to non-cash charges for depreciation and
amortization expense and $3.4 million of net income, partially offset by a $7.1
million decrease in other current liabilities and a $1.3 million decrease in
accounts payable. For the six months ended December 31, 2001, net cash provided
by operating activities was $15.6 million and was generated by a $15.5 million
decrease in accounts receivable (net of the allowance for doubtful accounts and
deferred revenue), $8.9 million for non-cash charges related to depreciation and
amortization, $5.5 million of net income, and a $1.1 million decrease in prepaid
expenses and other current assets, partially offset by an $11.5 million decrease
in accounts payable, a $3.1 million decrease in other liabilities, and a $0.9
million gain on sale of a building.
Net cash used by investing activities for the six months ended December
31, 2002 totaled $5.2 million and consisted of $13.2 million used for capital
expenditures and $2.1 million used for business acquisitions, offset by $9.7
million of net proceeds from the sale of marketable securities and $0.4 million
in proceeds from sale of fixed assets. Net cash used in investing activities for
the six months ended December 31, 2001 totaled $33.3 million and consisted of
$23.3 million related to net purchases of marketable securities, $10.0 million
used for capital expenditures, and $1.5 million used for the acquisition of
EDYABE, offset by $1.5 million in proceeds from the sale of a building.
Net cash provided by financing activities for the six months ended
December 31, 2002 totaled $1.5 million which was primarily generated by proceeds
from the issuance of common stock associated with the Company's stock option and
employee stock purchase plans. For the six months ended December 31, 2001, net
cash provided by financing activities totaled $1.8 million and consisted of $1.5
million of proceeds from the issuance of common stock in association with the
Company's stock option and employee stock purchase plans, and $0.3 million from
net borrowings under credit arrangements.
The Company's primary cash needs are for the payment of salaries and
fringe benefits, hiring and recruiting expenses, business development costs,
acquisition-related costs, capital expenditures, and facility-related expenses.
The Company's principal source of cash is from contracts with clients. If the
Company is unable to generate new contracts with existing and new clients and/or
the level of contract cancellations increases, revenue and cash flow would be
adversely affected (see "Risk Factors" for further detail). Absent a material
adverse change in the level of the Company's new business bookings or contract
cancellations, PAREXEL believes that its existing capital resources together
with cash flow from operations and borrowing capacity under existing lines of
credit will be sufficient to meet its foreseeable cash needs.
In the future, the Company may consider acquiring businesses to enhance
its service offerings, expand its therapeutic expertise, and/or increase its
global presence. Any such acquisitions may require additional external
financing, and the Company may from time to time seek to obtain funds from
public or private issuance of equity or debt securities. There can be no
assurance that such financing will be available on terms acceptable to the
Company.
8
RECENTLY ISSUED ACCOUNTING STANDARD
In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities, to expand upon and strengthen existing accounting guidance
that addresses when a company should include in its financial statements the
assets, liabilities and activities of another entity. Until now, one company
generally has included another entity in its consolidated financial statements
only if it controlled the entity through voting interests. FIN 46 changes that
guidance by requiring a variable interest entity, as defined, to be consolidated
by a company if that company is subject to a majority of the risk of loss from
the variable interest entity's activities or entitled to receive a majority of
the entity's residual returns or both. FIN 46 also requires disclosures about
variable interest entities that the company is not required to consolidate but
in which it has a significant variable interest. The consolidation requirements
of FIN 46 apply immediately to variable interest entities created after January
31, 2003 and to older entities in the first fiscal year or interim period
beginning after June 15, 2003. Certain of the disclosure requirements apply in
all financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company is currently evaluating
the requirements and impact of FIN 46 on its consolidated results of operations
and financial position.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation--Transition Disclosure, An Amendment of FASB Statement No. 123".
This statement provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of
Statement No. 123 to require more prominent and more frequent disclosure in
financial statements regarding the effects of stock-based compensation. The
provisions of SFAS 148 are effective for fiscal years ending after December 15,
2002 and the interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. The Company will continue to apply Accounting Principles Board Opinion No.
25 as the method used to account for stock-based employee compensation
arrangements, where applicable, but will adopt the disclosure requirements of
SFAS 148 beginning with its third quarter ending March 31, 2003.
In November 2002, the FASB issued FIN 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN 45 requires that upon issuance of a guarantee, the
guarantor must recognize a liability for the fair value of the obligation it
assumes under the guarantee. The disclosure provisions of FIN 45 are effective
for financial statements of interim or annual periods ending after December 15,
2002. The provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002, irrespective of a guarantor's year-end. The adoption of FIN 45 did not
impact the Company's consolidated results of operations or financial position.
In June 2002, the FASB issued SFAS 146, "Costs Associated with Exit or
Disposal Activities". SFAS 146 nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity". SFAS 146 requires that a liability for a cost associated with an exit
or disposal activity be recognized and measured initially at fair value only
when the liability is incurred. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002 and will be effective in
the Company's third quarter ending March 31, 2003. The adoption of SFAS 146 is
not expected to have any material adverse impact on the Company's financial
position or results of its operations.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on this 8th day of May 2003.
PAREXEL International Corporation
Date: May 8, 2003 By: /s/ Josef H. von Rickenbach
----------------------------
Josef H. von Rickenbach
Chairman of the Board and Chief
Executive Officer
Date: May 8, 2003 By: /s/ James F. Winschel, Jr.
---------------------------
James F. Winschel, Jr.
Senior Vice President and Chief
Financial Officer
10
CERTIFICATION
I, Josef H. von Rickenbach, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of PAREXEL
INTERNATIONAL CORPORATION; and
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report.
Dated: May 8, 2003 /s/ Josef H. von Rickenbach
---------------------------
Josef H. von Rickenbach
Chairman of the Board and Chief
Executive Officer
(principal executive officer)
11
CERTIFICATION
I, James F. Winschel, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of PAREXEL
INTERNATIONAL CORPORATION; and
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report.
Dated: May 8, 2003 /s/ James F. Winschel, Jr.
--------------------------
James F. Winschel, Jr.
Senior Vice President and Chief
Financial Officer
(principal financial officer)
12
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
99.1 Chairman of the Board and Chief Executive Officer -
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Senior Vice President and Chief Financial Officer -
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13